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TRANSITION FROM ACCELERATED DEPRECIATION TO GBI | 1
C h a l l e n g e U s
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Gokul Chaudhri | Partner | BMR Advisors
IPPAI-MNRE Conference 2009December 17, 2009 | Hotel Imperial | New Delhi
TRANSITION FROM ACCELERATED DEPRECIATION
TO GENERATION BASED INCENTIVE
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DISCLAIMER
This presentation provides general information existing at the time of
preparation. The presentation is meant for general guidance and no
responsibility for loss arising to any person acting or refraining from acting
as a result of any material contained in this publication will be accepted by
BMR Advisors. It is recommended that professional advice be taken
based on the specific facts and circumstances. This presentation does not
substitute the need to refer to the original pronouncements
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CONTENTS
WIND ENERGY
A perspective
Direct tax incentives
Indirect tax incentives
TRANSITION FROM ACCELERATEDDEPRECIATION TO GENERATION BASED
INCENTIVE (GBI) A pilot scheme
Disbursement mechanism
Tax issues
Concluding remarks
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WIND ENERGY
APERSPECTIVE
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Overview
Currently, India occupies fifth position globally with an installed capacity ~ 10,891 MW (as onOctober 31, 2009)
Wind energy share in Indias total installed power generation capacity ~ 7 percent
Benefits of wind power
Zero cost of fuel and low cost of operation and maintenance
Short gestation periodClean energy with no adverse environmental effects
Opportunity landscape
Indias wind power potential is estimated at 48,561 MW
Capacity addition programmes
11th
Plan ~ 10,500 MW Cumulative 12th & 13th Plan ~ 22,500 MW
Incentives
Several fiscal concessions / exemptions are available to independent power producers (IPPs) inthe wind sector some of these are discussed in subsequent slides
WIND ENERGY A PERSPECTIVE
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10 year tax holiday in a block of 15 years for:
Generation or generation and distribution of power
Transmission or distribution of power by laying new distribution lines
Tax holiday available to an undertaking which begins to generate power or starts
transmission or distribution by laying a network of new transmission / distribution linesbefore March 31, 2011
Accelerated depreciation (80 to 100 percent) on Written Down Value (WDV) basis forenergy saving and renewable energy devices such as wind mills, solar cookers etc
Additional depreciation of 20 percent
One time election to power generating companies to claim depreciation on straight-line basis (SLM) available
INCENTIVES FOR WIND ENERGY DIRECT TAX
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GBI instead of accelerated depreciation examined in the subsequent slides
Thrust of fiscal incentives for mega power projects (includes hydro power projects of
specified capacities); eligible for complete customs and excise duty exemptions
Power projects, renewable or otherwise, not qualifying as mega power projectseligible for concessional rate of customs duty at 18.62 percent (as against 21.52percent)
Concessional rates for excise (Nil rate of duty as against 8 percent) and customs duty(Nil to 5 percent of BCD as against 7.5 percent / 10 percent) available for specificrenewable sources of energy like wind, solar, biomass etc
Renewable energy devices typically attract a lower VAT rate of 4 percent
Deemed export benefits available; input side costs reduced by availing deemedexport benefits like Advance Authorization or Deemed Export Drawback
INCENTIVES FOR WIND ENERGY INDIRECT TAX
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TRANSITION FROMACCELERATEDDEPRECIATION TO GBI
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TRANSITION FROM DEPRECIATION TO GBI
India occupies fifth positionglobally in the installed capacity, however the power
generated is low [installed wind power capacity (10,891 MW) of 22.42 percent of thetotal potential (48,561 MW)]
Historically, the wind energy sector attracted investments under the accelerateddepreciation route this resulted in a marginal benefit due to the offsetting impact ofaccelerated depreciation on tax holiday
Thus, the benefit of accelerated depreciation route losing its importance
Gradually, the focus is on incentivizing generation of power from renewable energyrather than on building capacities and creation of capital assets
Considering the need of power generation and objectives of investors, a proposal toprovide a choice between accelerated depreciation benefit and GBI to IPPs has beenmooted
For this, the Government has announced the scheme of GBI for wind energy
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GBI A PILOT SCHEME
GBI for grid connected wind power projects which are
certified by concerned utility announced by Ministry ofNew and Renewable Energy (MNRE)
GBI of Rs 0.50 per unit(kwh) for a period of 10 yearsto the eligible project promoters
Scheme applicable to wind power projectscommissioned for sale of power to the grid; notapplicable for capacities set up for captiveconsumption, third party sale etc
Projects notto claim benefit of accelerateddepreciationunder the Income tax Act (IT Act)
Projects to have minimum installed capacity of 5 MW
and to be installed at project sites approved by theCenter for Wind Energy Technology (C-WET)
GBI to encourage actual energy generationratherthan capacity addition only, resulting in optimumutilization of wind resource
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GBI DISBURSEMENT MECHANISM
GBI would be disbursed by Indian Renewable Energy Development Agency (IREDA)
through e-paymenton a half yearly basis
This incentive is over and above the tariff approved by the State Electricity RegulatoryCommissions
The distributor / utility will provide a periodical certificateto the IPP regarding the netelectricity fed to the grid
Incentives shall be disbursed by IREDA, based on the grid synchronization letter andcertified information about the net electricity fed to the grid from the wind power project
Project developer will have to submit a self declaration about non-claiming ofaccelerated depreciationto IREDA
Copy of income tax return at the end of each financial year to be submitted with IREDAto establish that the benefit of accelerated depreciation has not been claimed
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GBI ISSUES
Depreciation
Whether accelerated depreciation means the higher rate on WDV basis in comparisonto SLM basis?
In case the SLM rates are not to be considered for this purpose -
Whether accelerated depreciation means the higher rate of 80 percent on windmills as compared to the general rate of 15 percent?
Whether accelerated depreciation also includes additional depreciation of 20percent?
In case accelerated depreciation refers to higher rate of 80 percent available towind mills and / or additional depreciation of 20 percent as against the general rateof 15 percent would the claim of depreciation at general rate be correct under theIT Act?
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GBI ISSUES (CONT)
Applicability in case of two undertakings
In a situation wherein there are two undertakings one utilizing its capacities for thirdparty and captive consumption and the other one utilizing its capacities towards grid, thefollowing issues arise:
Whether the GBI is available for the undertaking dedicated to the grid or is itconnected to the entity?
Whether there can be a different basis for claim for depreciation for the differentundertakings within the company that is to say, non-accelerated basis for theeligible undertaking and accelerated depreciation for the non-eligible undertakings?
Direct tax Code (DTC) Bill
The DTC proposes a shift from profit linked incentives to investment linked incentive forgeneration / distribution of power - applicability and impact?
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CONCLUDING REMARKS
The policy for wind energy is continuously evolving
Phase I ~ Accelerated depreciation
Under Phase I, investor have only one option, ie availing the accelerateddepreciation benefit useful for diversified profit making businesses
Phase II ~ GBI
Under Phase II, the investor has an option to avail the benefit of eitheraccelerated depreciation or GBI Useful for IPP investors
Phase III ~ CERC tariff regulations for wind energy
Under Phase III, the investor has an option to either follow the generic CERCtariff norms or seek an approval for a project specific tariff
The new regulations, provide an option to the developer to avail the benefit ofeither accelerated depreciation or GBI for determining the tariff Both thebenefits to be subsumed in the tariff
The above permutations are likely to have a significant bearing on the IRR of aproject
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